Investment Financing - What would YOU do if you were me?

Question

Hello all, I am new to the business and very eager to get started. I have been doing much research and I really want to get into the game, however I am not sure how to fund a rental. I live in Northern Virginia where deals aren't typically amazing so my understanding is the best bet is buy and hold since I'm in a pretty stable market. I know some folks that break even with cash flow but they are willing to hold since appreciation is so stable here.

What would you do with what I have:

I currently am in a home with 20 years left on the mortgage. We owe 280 and it is worth 550-600 (depending on who you ask). I am interested in townhouses that cost approximately 350-450K.

• What is the best way to finance the rental?
• Should I save up for the down payment or leverage my equity?
• If I leverage equity, should I go for 15 year Investment loan or 30 year and pay it down? Or maybe don't pay it down.
• Should I do cash-out refinance or Heloc for the investment down payment?

I am finally on the principle building side of my primary mortgage so starting the loan over makes me nervous but if it makes sense then I'm in. Any and all input is appreciated. I know there's A MILLION ways to finance so I'm interest in hearing what YOU would do if you were me.

Rowen Burney · Answer

If I were you I honestly wouldn't even think about dropping 350k on a house that only breaks even. Relying on appreciation alone to make money is just as good as speculation or gambling in my book. I would recommend you look at different markets that are up and coming with cheaper home prices and higher rents. In places like this, you should be able to find cash flow positive properties with enough work and appreciation would just be icing on the cake. Just my $.02.

Michael P. · Answer

@Tim F. Do you want to build a portfolio?  Then i'd buy turnkeys from a reputable company where you can get in for lower prices and buy one house a year or whatever at 25% down of 120,000. Keep going in chunks of 30K until you have 10 houses or whatever your number is.  Professional management will be less headaches over small dumb things.  A tenant of mine in Arlington, VA just called me to complain that a neighbor moved a plant sitting on her patio.  I told her I would personally drive down there if she wanted and dump the neighbors plants onto their patio for retaliation, just let me know if you want me to do that ... but she declined :(

Alternatively, do you want to stay local in nova, self manage 1-2 rental townhouses at 400K each and thats the end goal for your portfolio. Then go that route.  Depends on what your goals are.  Staying local has better appreciation, less cash flow, and less risk.  Going out of state more cash flow more risk.  Personally i'm doing about half and half local & out of state.  (Just starting up on the out of state buying myself)

Jonathan K. · Answer

Agree with what other people have said about NoVA not having much in the way of cash flow, but nearby markets like Frederick, MD, Charles Town, WV, or Winchester, VA could potentially work.

David Miller · Answer

@Tim F. Been here before :). Leave your personal residence alone and continue paying it off. Cut some expenses, save more money to buy more property. If you want to buy faster find a partner. But from my experience your house is your personal property and I would hesitate before using it in a business.

James Wise · Answer

If pulling money out of the personal residence is your own source of capital smarted play is to refi the house on a 30 year note. If you want to pay faster on a 15 year schedule you can, but won't be required to do so. Gives you flexibility.

Ali Boone · Answer

You aren't going to get positive cash flow on that rental. NoVA really doesn't offer cash flow in general. I think you'd be much better off considering investing out-of-state. You don't have to live near your properties. I live in California and aside from one property local to me, my next nearest property is 2200 miles away. For cash flow purposes.

Tim Herman · Answer

@Tim F. a calculator and leverage are your friends. Assumptions You pull out $100000 heloc.  your choices are buy 1 house all cash. 3 houses with $30000 down with $10000 reserve or 5 houses at $20000 down. Rent on houses following the 1% rule=$1000. Using the 50% rule on expenses=$500. 10 years down the road houses worth $150000(less than 5%). House bought outright= $60000 income+ $50000 appreciation= $110000. 3 houses bought with 30% down. Mortgage paydown=$56000. $150000-$56000= $94000 equity x 3= $282000. Debt service is $375 out of the $500= $125 per door/per month=$45000 income. 3 properties yield  $282000+$45000=$327000. Almost forgot the $10000 it will grow to less than $11000. The 5 houses debt paydown=$65000. $150000-$65000=$85000 x 5= $425000. Debt service $429=$70 per month profit. $70*5*12*10=$42000. 5 houses= $425000+$42000=$467000. What choice so you want to take.

Tim F. · Answer

Honestly probably turnkey. But if I refi a little extra I could use that to rehab.

I guess my main question would be, what is best for long term financial cost/gain? If we refinance, we go back to square one and start paying a lot of interest on our primary residence. The only positive would be making my equity work for me.

Kyle Deutschmann · Answer

@Tim F. Hey Tim, congrats on taking these steps towards buying an investment property! Sounds like you have multiple options that could work for your situation. Since you have a fair amount of equity, a cash out refi on your primary residence or maybe a HELOC would probably be the best way to access capital quickly (and at relatively cheap, owner occupied rates) for a down payment. Are you interested in more turnkey rentals or properties that need some rehab? Best of luck, Kyle Deutschmann

Tim F. · Answer

My wife and I have discussed moving and while it makes the most sense financially, it doesn't for our family plan. If we wanted/needed to upgrade anyway, then sure. But we don't want the hassle of moving.

If the numbers work out and we are able to be cashflow positive, what would be the best option with the above numbers?

Investment Financing - What would YOU do if you were me?

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